PARIS CLUB REDUCES NIGERIA'S DEBT: JUBILATION NOW,

UNCLAS SECTION 01 OF 02 ABUJA 001186

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON KGCN PGOV PREL NI
SUBJECT: PARIS CLUB REDUCES NIGERIA'S DEBT: JUBILATION NOW,
CHALLENGES AHEAD



1. Summary: The Paris Club group of creditor nations has
agreed to reduce Nigeria's debt by about 60 percent. This is
seen as a reward for Nigeria's effort at reforming its
economy with its home-grown economic reform program.
Modalities for implementing the agreement will be negotiated
between the Paris Club and the GON at a meeting scheduled
for September in Paris. Nigerians on the street, however,
are skeptical that the debt deal will confer any benefits on
their country in light of rising food prices and Nigeria's
inadequate infrastructure. End Summary.

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The Deal
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2. On June 30, the Paris Club agreed to a 60 percent
reduction in Nigeria's Paris Club debt of about USD 30
billion. The GON will first pay USD 6 billion in arrears and
buy back the remaining debt at 40 cents on the dollar --
roughly USD 9.6 billion -- in two tranches paid six months
apart. A meeting between the GON and Paris Club is
scheduled for September in Paris to work out the modalities
for implementing the agreement.


3. Nigeria's total foreign debt is about USD 35 billion.
Around 85 percent of the debt is owed to the Paris Club; 8
percent is owed to multilateral financial institutions such
as the African Development Bank and the World Bank; and the
rest is owed to the London Club of private-sector creditors.
Minister of Finance Dr. Ngozi Okonjo-Iweala confirmed that
Nigeria will seek opportunities to reduce other debt when
and where possible, but her focus had always been to obtain
relief from the Paris Club. She also noted that debts owed
to multilateral institutions carry lower interest rates and
are of longer tenor than debts owed the Paris Club.

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A Novel Approach
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4. The debt treatment agreed on by the PARIS CLUB for
Nigeria's debt is a relative novelty. PARIS CLUB debt
treatments normally carry "IMF conditionality" as a
prerequisite for debt treatment, i.e., the country must
enter a IMF-imposed Structural Adjustment Program (SAP).
Nigeria's debt deal involves the use of a Policy Support
Instrument (PSI),i.e., a home-grown economic stabilization
plan with IMF monitoring. Nigeria has been operating under
its own economic reform program, the National Economic
Empowerment and Development Strategy (NEEDS),which operates
without a formal IMF agreement but with quarterly assessment
by the IMF. Minister Ngozi stated to the media that this
precedent proves developing countries can do things right
and earn the respect of developed countries.

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A Plus for the Ongoing Economic Reform
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5. On the evening of June 30, an elated President Obasanjo,
on a state broadcast aired by all Nigerian television
stations, announced that that the debt deal is a reward for
painstaking efforts spanning six years and, most especially,
a reward for the GON's effors at reforming the economy via
the NEEDS program. He also stated that the debt deal proves
cynics wrong, and he invited cynics to join with his
government to move the nation forward.

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Where Will the Money Come From?
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6. Later, in a live television program that evening aired by
the state-owned National Television Authority featuring
Finance Minister Ngozi and Senator Faruk Bello of the
opposition All-Nigeria People's Party as invited speakers,
Minister Ngozi confirmed that the debt treatment would
result in USD 1 billion (about 130 billion naira),which
would have been used for debt service, instead being
available for use in the domestic economy. Specifically, she
mentioned health care, education, and infrastructure. She
also stated that the debt reduction does not mean that the
GON will relax and stop carrying out reforms; rather, it
will continue the reforms and improve the economy. She
confirmed that for the benefits to trickle down, the reforms
must continue.


7. Senator Faruk Bello, on the other hand, said the deal was
not a cause for jubilation, because the GON will have to
make huge payments to the Paris Club instead of using the
money to improve the economy and infrastructure.
Specifically, he mentioned that the USD 6 billion (about 780
billion naira) to settle the arrears would require a
supplementary appropriation. Bello said he doubted whether
this measure will enjoy smooth sailing through the National
Assembly, because President Obasanjo had earlier agreed that
"excess revenues" (i.e., oil revenues above a benchmark oil
price of USD 25 or USD 27 saved in a special account) would
be used to cushion oil price volatility whenever
international crude oil prices dip below a certain level,
and they would also be used to improve infrastructure.

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Reaction among GON Officials: Break Out the Champagne!
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8. At the Finance Ministry, the reaction to the debt deal
was unmitigated jubilation. Embassy Economic Specialist,
while at the Finance Ministry at 11 a.m. on June 30 working
on a commercial advocacy matter, heard a general commotion
when the debt buy-back was announced. He encountered
Minister Ngozi in the hallway and congratulated her on her
accomplishment. She beamed as she shook his hand and told
him the GON had secured a 60 percent write-off. The
minister then entered a conference room where her minister
of state, Esther Nnenadi Usman, was holding a meeting with
the IMF quarterly assessment team, and announced the debt
deal to all present. The room erupted in cheers and
applause. Someone suggested that they bring in champagne
and throw a party. The Minister's secretary, Mrs. Fawzia
Ahmed, known to Econ Section as a very proper and demure
Muslim lady, was so elated that she exclaimed, "I am
prepared to take off my veil and drink champagne!"

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Public Reaction: What About Food and Electricity?
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9. Because the debt deal was publicly announced at 8 p.m.
local time June 30, there was little time for the Nigerian
print media to gather "man in the street" reactions. The
BBC's Hausa language service broadcast interviews with
individual citizens on July 1, and their general reaction
was skeptical, focusing on whether the GON would exercise
prudence in spending the money that otherwise would have
gone for debt service and what effect, if any, the debt deal
would have on rising prices of staple foods. Even at the
Finance Ministry, Economic Specialist encountered a
businessman who did not join in the general jubilation but
instead noted that the deal would make no difference unless
the GON quickly moved to improve the country's
infrastructure.


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Comment
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10. This debt deal is a plus for Nigeria's economic reform
and opens a new chapter in the history of the relationship
between the Paris Club and debtor nations. Despite Senator
Bello's statement, it is unlikely that President Obasanjo
will experience much difficulty in getting appropriations
from the National Assembly for the debt payments. State
governors, however, who are supposed to receive 53 percent
of Nigeria's oil revenues, will undoubtedly object to the
USD 22 billion in "excess revenues" from petroleum sales
being used for debt payments. Meanwhile, President
Obasanjo's opponents are liable to interpret the debt deal
as donor countries' endorsement of his policies and even as
tacit approval of his alleged attempt to extend his
presidency beyond his second and final term, which ends in

2007.


11. Comment cont'd.: Now that the President's "economic
dream team" has obtained this valuable prize for him, it
remains to be seen whether he will continue the economic
reforms and retain the reformers. His public pronouncement
that the debt deal vindicates his reforms indicates that he
may decide to stay the course. If Obasanjo's economic team
members stay in their current positions, the debt deal means
that the "dream team" will have less reason to travel
incessantly to the capitals of creditor countries and have
more time to spend at home working on Nigeria's domestic
economy and infrastructure problems.

CAMPBELL